Best Practices for Creating and Maintaining Policies and ... - GIPS

e. Subjective unobservable inputs for the investment where markets are not active at themeasurement date. Unobservable inputs should only be used to measure fair value tothe extent that observable inputs and prices are not available or appropriate.Trade date accounting is used for all periods. Accrual accounting is used for fixed incomesecurities and all other investments that earn interest income. Accrued income is included inbeginning and ending portfolio market values when calculating performance. Dividends areaccrued as of the ex-dividend date.Procedures to consider:• The firm may choose to establish a valuation policy documented outside of the firm’sGIPS policies and procedures. Such a policy could detail valuation procedures forspecific asset classes or securities.• Firms should consider having a valuation oversight committee to ensure that valuations ofportfolio investments have integrity and fairly reflect their value.• When the firm regularly receives or calculates multiple valuations for one portfolio (e.g.,internal valuations compared to those received from the custodian or a fundadministrator), the firm should determine which will be the official valuation source forthat portfolio and use that source consistently.• Firms should establish a regular review of the use of subjective, unobservable inputs todetermine if these investments are material to each of their composite strategies.• Firms’ accruals should be verified through timely reconciliations between the firm’srecords and the custodian’s records.Helpful hints:• Firms that typically invest only in liquid securities in active markets should still consideraddressing in their policies and procedures potential scenarios where markets suddenlybecome illiquid and objective, observable investment prices are unavailable.VII. Portfolio valuation frequencyThe GIPS standards have gradually increased the minimum required frequency of portfoliovaluation from quarterly (prior to 2001), to monthly (from the beginning of 2001 to the end of2009), then to as of each calendar month end or the last business day of the month as well as onthe date of all large cash flows (beginning in 2010). A large cash flow, which is to be defined bythe firm for each composite, is the level at which the firm determines that an external cash flow(cash or investments that enter or exit a portfolio) may distort performance if the portfolio is notvalued at the time of the cash flow. Firms must define the amount in terms of the value of thecash/asset flow or in terms of a percentage of portfolio assets or the composite assets. Firms mustalso determine if a large cash flow is a single external cash flow or an aggregate of a number ofexternal cash flows within a stated period of time.Best Practices for Creating and Maintaining GIPS Policies & Procedures Page 14